Porter’s Diamond Model

Porters Determinants of National Competitive

Advantage
Firm Strategy,
Structure & Rivalry
• Intensity of local rivalry
• Extend of corporate
investment

Factor Conditions Demand Conditions

• Basic Factors (Land, Labor)
• Home country may support
• Advanced Factors (Highly
scale efficient operations by
educated workforce, digital
Itself
communications)
• The level of sophistication
• Generalized Factors
of home demand
(Capital, infrastructure)
• Pressure from local buyers
• Specialized Factors
to upgrade
(Skilled personnel)

Related &
Supporting Industries
• Availability & Quality of
local suppliers
• State & development of
clusters
 1. Factor Conditions
• Factor Conditions: The nations position in terms of
factors of production such skilled labor or
infrastructure necessary to compete in a given
industry.
• Most of the factors of production that are required in
today’s sophisticated and knowledge-intensive
industries are created factors (such as skilled human
resources or a scientific base).
• Governments may have an important role in creating
or supporting the creation of factors of production
by funding training and support specialized scientific
institutions.
 Factor Conditions:

Labor (qualified and non-qualified)

Natural resources, land;
Capital
Entrepreneurship
Technology and Knowledge Base
Infrastructure
Factors:
Non-key or general use
Specialised (more difficult to duplicate)
 Factor Conditions:

• Basic factors can provide only an initial advantage

• They must be supported by advanced factors to maintain success.
E.g.
• Switzerland was the First country to experience labour shortages.
They abandoned labour-intensive watches and concentrated on
innovative/high-end watches.

• Japan has high priced land and so its factory space is at a premium.
This led to just-in-time inventory techniques.

• Sweden has a short building season and high construction costs.

These two things combined created a need for pre-fabricated houses.
Factorcondition Greatest land mass, vast oil
deposits, natural resources,
Russia largest petroleum industry
7th largest country in terms of land mass,
2nd largest population, annually

India graduates more English speakers

than US, engineering and computer skills.
India
Largest and most sophisticated capital
market in world, expansion, innovation,
well prepared for international
competition
US
Great entrepreneurial ability, low cost
start-ups, high R&D funding,
successful Pharma industries and
Denmark medical equipment's
Ms. Antriksha Negi,Assistant Professor ,
VSBS,VIPS
 Demand Conditions:

• Home country Demand plays an important role in

producing competitiveness.

• Enables better understand the needs and desires

of the customers

• It shapes the attributes of domestically made

products and creates pressure for innovation and
quality.
 Demand Conditions
• Porter argues that a sophisticated domestic market is an
important element to producing competitiveness.

• Firms that face a sophisticated domestic market are likely to sell

superior products because the market demands high quality and
a close proximity to such consumers enables the firm to better
understand the needs and desires of the customers.

• Nations gain competitive advantage in industries where the home

demand gives their companies a cleared or earlier picture of
emerging buyer needs, and where demanding buyers pressure
companies to innovate faster and achieve more sophisticated
competitive advantages than their foreign rivals.
• E.g. 1
– Italian ceramic Industry after the world war II
– There was a postwar housing BOOM !!
– Consumers wanted cool floors because of Hot climatic
conditions
• E.g. 2
– Japan’s knowledgeable buyers of cameras made that
industry to innovate and grow tremendously
• E.g. 3
– The French wine industry. The French are sophisticated
wine consumers. These consumers force and help French
wineries to produce high quality wines.
Demandcondition

or,
 3. Related and Supporting Industries
• Innovation may require considerable interaction
between, a firm, and its users or supplies and
between firms themselves.
• Geographies and cultural closeness can be crucial
factors in this process: agents located near each
other can take advantage of shorter lines of
communication and an ongoing exchange of ideas
and information which may also be helped by the
development of high-trust working relationship.
 Related and Supporting Industries:

• Benefits of investment in advanced factors by Suppliers and

related industries is significant
• Creates clusters of supporting industries, thereby achieving a
strong competitive position internationally.

E.g.1 Rome
• The enamel production unit was available.
• The glazes production was also favorable.
• These two were the main composition of producing tiles.
• This reduces the Transportation cost.
4. Firm Strategy, Structure and Rivalry
• National circumstances and context create strong tendencies
in how companies are created, organized, and managed, as
well as what the nature of domestic rivalry will be.

• Government policy can influence a firm’s behavior through its

taxation policies towards long-term investment
 Firm Strategy, Structure & Rivalry:

• Long term corporate vision (Strategy) is a determinant of success

• Presence of domestic rivalry improves a company’s
competitiveness

E.g. 1 Rome
• Low entry barriers to market in the tile industry
• Rivalry became very intense
• Breakthroughs in both product and process technologies

E.g. 2
• Japan has high priced land and so its factory space is at a premium
• This led to just-in-time inventory techniques
• (Japanese firms can’t have a lot of stock taking up space, so to cope with the potential of
not have goods around when they need it)
• They innovated traditional inventory techniques.
 Firms strategy, structure and
rivalry
Japanese electronic market

Canon, Casio, Citizen, Fujifilm, Fujitsu, Hitachi,

JVC Kenwood, Konica Minolta, Kyocera,
Mitsubishi Electric, NEC, Nikon, Nintendo,
Olympus, Panasonic, Pioneer, Ricoh, Seiko
Group, Sharp Corporation, Sony,
TDK, Toshibaand Yamaha.
• Factor Conditions
– A country creates its own important factors such as skilled resources and
technological base.
– The stock of factors at a given time is less important than the extent that
they are upgraded and deployed. Local disadvantages in factors of
production force innovation.
– Adverse conditions such as labor shortages or scarce raw materials force
firms to develop new methods, and this innovation often leads to a
national comparative advantage.
• Demand Conditions
– When the market for a particular product is larger locally than in foreign
markets, the local firms devote more attention to that product than do
foreign firms, leading to a competitive advantage when the local firms
begin exporting the product.
– A more demanding local market leads to national advantage
– A strong, trendsetting local market helps local firms anticipate global
trends.
• Related and Supporting Industries
– When local supporting industries are competitive, firms enjoy more
cost effective and innovative inputs.
– This effect is strengthened when the suppliers themselves are strong
global competitors.
• Firm Strategy, Structure, and Rivalry
– Local conditions affect firm strategy.
– While at a single point in time a firm prefers less rivalry, over the long
run more local rivalry is better since it puts pressure on firms to
innovate and improve. In fact, high local rivalry results in less global
rivalry.
– Local rivalry forces firms to move beyond basic advantages that the
home country may enjoy such as low factor costs.
 The role of government

• The government plays an important role in Porter’s

diamond model.
• Like everybody else, Porter argues that there are
some things that governments do that they should
not, and other things that they do not do but should.
 The role of government to support the
diamonds:
1. Focus on specialized factor creation
Government should provide national infrastructure like education or
research institutions connected with industry and encourage privet
investment to create factors.
2. Avoid frequent intervention in factor and currency market
Intervene to create lower factor cost or favorable exchange rate that help
firm to compete internationally
3. Enforce strict product, safety and environmental standards
Enforce strict product, safety, and environmental standards which pressure
companies to upgrade technology, improve quality and provide features
that respond to consumer demands.
4. Direct cooperation among industry rivals
• Allowing more cooperative R&D to achieve economy of scale to reduce
duplication of resources and cost